Ken Lawson, JD

Some time ago I read an article in the Mortgage News Daily about stories of woe over the delays of short sale approvals or rejection, the inability to talk to the negotiators, and a stated frustration over spending a couple hours a day trying to push the lender for a decision.

The delays then were a reality…and it still is.   It isunderstandable that agents, sellers, and buyers are frustrated over those delays. After all, it is difficult to get a buyer to wait for months for approval, many walk away before then. However, I have a close relative and friends who are top executives in nationwide banks and secondary market investors. The delays became a reality because they have experienced a coming together of two major impacts: exponentially increased numbers of short sale proposals caused by the housing and mortgage collapses, and severe financial crises forcing many of them to teeter on the edge of bankruptcy. Indeed some of them have been forcibly nationalized by the government, taken over by other banks, or dissolved. Those remaining have inadequate personnel to handle the sudden increase in short sale, not enough revenues to create a huge force of negotiators/analysts to process the short sales, and the time it takes to train more personnel is also very lengthy. The result? Delays. That’s a reality we have to live with for a while. The banks are trying to catch up. They understand the losses.

Some raise the issue about news stories that the approval process would be streamlined with the government takeovers and that processing would take just a few days.  However, along with the streamlining came increased levels of bureaucracy causing little or no shortening of the process.

There is another side of that coin. The bailouts by our Uncle Sam has inadvertantly caused an inticement for lenders to foreclose rather than mitigate. When you remove penalties for holding REO’s and give money to cover the losses, where is the incentive to approve short sales? This has been partially rectified by Uncle Sam backpeddling with the new law encouraging lenders to approve more short sales, but it is sort of like when companies took away nutrients when they made white bread and added back just a small fraction of nutrients and called it “fortified”.

Short sales still require patience.

Now about the inability to contact negotiators. Realtors make the mistake of thinking that the servicing lender negotiator or their management decide the short sales. Not true, usually. The loan is owned usually by a secondary market investor (SMI). The so-called negotiator negotiates very little and is merely a processing clerk, usually very low paid. You don’t need to talk to him or her until the case is processed and a response comes back from the SMI.  The most important thing is that you do not give him or her a reason to tank your proposal. The proposal must be designed, not for the servicing lender, but for the SMI. When the response comes back, you will be notified.  All you need to do is maintain communication, usually with the call centter for updates.  Also, if there is mortgage insurance and the MI carrier has paid a claim, they too will need to provide approval. The negotiator merely provides their response to you. I would much rather talk to the loss mit call center people. Make them laugh. They will often go out of your way to talk during breaks to the negotiator and make things smoother for you. Do NOT call supervisors, unless the someone lies to you and it will be obvious. They rarely do anything to help you, will stick to only what is required of them, and can actually impede your case.

Finally, the third item, “a couple hours a day trying to push the lender for a decision”. Bad idea. Every contact you make to the loss mit call center or the negotiator gets logged into the contact database. If you call so often you will likely annoy or even anger them. Doing that could cause them to tank your proposal, and no one would know. There is no reason to call so often unless there is a promise of something by a specific date. Then call the next day after it is due. Otherwise, one call a week to the call center is enough. If they say it will take 15 days for a response, you justify that call by telling them merely that your client is calling and they demand you to check on progress. Keep it friendly. This approach is efficient, and stress-free. Everyone is happy.

The idea of pushing the lender for a decision is ridiculous. The servicing lender is not the one making the decision usually. Trying to push them is like trying to push a rope!

We have published for you complete and comprehensive training course and step by step guides. They provide not only step by step guidance for handling short sales and loan modifications, but they also provide a deep understanding of liability and how to avoid the liability minefields of short sales and loan mods. Further, for new agents and investors, there is instruction in how to run an efficient and effective short sale and loan modification business. The course consists of two books:

Short Sales & Loan Modifications: A Practical Guide for Real Estate Agents and Investors

Short Sale Business Manual (includes loan modifications)

The Lawson Group Mediation Services, LLC

Ken Lawson, JD

In a large number of short sale cases, the lender has required the sellers/borrowers to sign a  promissory note as a condition of the short sale approval.  We often are asked if there are ways to get rid of that promissory note after the short sale is completed.

The answer is “Yes!”  However, before describing the process to eliminate a

Promissory Note

promissory note after a short sale, it is important to review the facts.  A short sale is normally approved by the secondary market investor, who we reach through the servicing lender.  That bank or mortgage company to whom payments were made serves as a gateway to the investor.  Once that investor has approved the short sale, along with requiring the promissory note be signed by the borrower or seller, the borrower then makes their payments to the servicing lender.  Now, however, that note is an unsecured debt to the servicer.  It is a non-performing asset that is more of a liability to the servicer than an asset.
After a year of so of making the payments, the servicer’s people responsible for managing this debt are different from who originally was involved.  Their motivations are different and there is a great opportunity to negotiate away the promissory note that was signed as a condition of short sale approval.

Once you or your client has reached this point, an attorney can often negotiate settlement of this debt for a percentage of the note’s balance.  Almost always, 50-80% is approved as a cash settlement.  However, 25-50% is highly likely if the borrowers are employed in typical blue-color jobs, are of advancing age, or have deteriorating health.  If the borrowers are approaching retirement, have major health issues, or their income has dropped, 10-25% becomes very reachable to settle and pay off a promissory note.  At this point, even borrowing the money to pay this amount is worth-while.

Understanding the motivations of these servicing lenders is important and negotiating a cash payoff of a promissory note after a short sale becomes much easier for a much lower percentage if you catch the lender at the right time.  This is usually about one year after the short sale.

Best wishes,

Ken Lawson, JD

My contacts reported to me that a new strategy has emerged among second lien holders.  These banks and investors see the real estate boker commissions as a resource for themselves.  By demanding more money than the first lien holders will approve from the proceeds, the 2nd lien holders know that to make the deal happen, the agents will likely kick in some of their commissions.

This figure of $6,000 or $6,500 is no.  In the early 90′s when I represented creditors, a bank executive told me that when they demand $5,000, most people could raise that amount if they wanted to buy a home.  However, $6,000 is the amount that most people could not raise.  Thus, almost 20 years ago, that figure was the magic number to demand if the bank wanted the short sale to fail in order to hurt the borrower, according to this bank executive, and, he added, this is a number that has spread around bank executive circles around the nation.

Now, however, these banks see that number, not only as the magic number to sabotage the short sale in order to punish the borrower.  They discovered that in order to make the short sale happen, many of the agents were kicking in a portion of their commissions.  Thus, $6,000 is no longer the magic number to sabotage the case, but $6,000 is a new source of revenue for themselves, coming predominantly from the agents.

So the insiders report that those who only want to sabotage the case may demand much more money now, but these banks and secondary market investors who prefer a short sale over a foreclosure (these second lien holders would get nothing from a foreclosure…except bailout funding) have found a new source of revenue over and above the $2,000-$3,000 being permitted out of the proceeds for them by the first lien holders.

Thus, we are seeing a rash of cases wherein the second lien holders are demanding $6,000 or $6,500 to settle the case, knowing that neither the sellers nor the buyers will be able to come up with those funds, but also relying on the agents to give up some of their commissions to make it happen.  So, many second lien holders are now seeking the $2,000 – $3,000 approved to be paid to them from the first lien holder, plus additional funds from buyers and agents up to $6,000 or $6,500, and the approval not in full satisfaction of the debt so they can pursue the deficiency post-short sale.   According to contacts, this is the current trend.

Those of you who believe that the financial institutions are nothing short of evil now have new ammunition for that belief.  These institutions are intentionally relying on the agents’ good will toward their clients or who are trying to salvage at least a little of their commissions.  They are most certainly biting the hand that feeds them.  Without the agents, there would be no loss mitigation!

How widespread this becomes, we will watch and see.  It may be a wise course of action for agents to consider not taking short sales with a second lien on the property.  However, let the agent beware of this potential new threat to short sales.

Best Wishes,

Ken Lawson JD

TheLawsonGroup Mediation Services

Recently we had a case where an agent reported that the homeowner of a home being sold as a short sale had just died.  What happens then?  Can the home still be sold in a short sale?

I receive a number of inquiries concerning the steps to take when the homeowner dies before the short sale transaction can be completed.

The answer is very straight forward and easy.  Yes, the property can still be sold in a short sale…except when it cannot.

When the homeowner dies with a will, there is only one heir or all heirs agree, and not other creditors other than mortgage holder(s), it is very simple to appoint someone to continue the short sale process to closing.

Actually, this is the one of the most common scenarios:  an elderly homeowner dies with no debts other than the mortage(s) and few or only one heir.

In some states, the Probate Court has a simple process whereby the heir goes to the Probate Clerk’s office, pays a fee, completes a fill-in-the-blank form, is interviewed by the Probate Judge, or Clerk & Master, and is granted the letters of administration.  Other states have a statutory process of completing and filing an Affidavit For Transfer of Real Property in small estate cases, having a deed prepared to transfer the property to the heir, who then transfers the deed at closing to the short sale buyer once lienholder approval has been obtained.  Other states have variations of these procedures where the estate is small.  If your state does not have a simple, inexpensive process for small estates, then a lawyer must be hired to open the estate and obtain the letters of administration.

When you are in the middle of obtaining approval for a short sale and the homeowner dies, do not panic.  Usually the solution is simple.

Best Wishes,

Ken Lawson, JD

In my 20 years of practicing law, I have seen a lot of lawsuits over some of the what sometimes seem to be the least likely situations.

I have written in the past on several cases some various situations in which real estate agents may be at risk from seller clients in short sale cases.

However, as I read the lawsuits, real estate agents are very often at liability risk from the other agent in the transaction, in situations in which your E&O insurance may not provide protection.

One such a situation involves short sales.  It happens often, about half the time right now, that the Secondary Market Investor (SMI) will reduce the real estate agent commissions as a condition to lienholder approval.

Sometimes the servicing lender will also attempt to reduce the short sale commission, however, unless that reduction is a published policy that is enforced across the board, it is discriminatory and illegal, so we are able to prevent that from happening.

If the SMI legally reduces the short sale commission, the cooperating agent may object to having their commission reduced.  Some listing agents solve this problem by only asking for a commission that it would likely be reduced to.  However, if you do not ask for a full commission in short sales, you will not get a full commission.  I often see our agents getting 7% commission, but they would never see it if they did not ask for it.  FHA loans require 6%, but a lot of loans are not owned by Fannie/Freddie and some will lower them to 5% and others will approve 7%.  But…YOU DO NOT GET FULL COMMISSION UNLESS YOU ASK FOR IT!

However, some cooperating agents have been suing listing agents over the reduced commissions.  Others have been filing grievances with the local board and submitting it to arbitration.

Here is what we recommend for those short sale listing agents who want to try to get full commission.  First, insert language in the agent-to-agent remarks that this is a possible short sale and for the agents to see the attached media.  The attached media is a disclaimer that tells them about the possibility of a reduced commission and to obtain from the listing agent the short sale instructions.  The short sale instructions is a Buyer Packet we provide to the agents who work with us.  That packet describes the possibility of reduced commission and instructs them to have a conversation with the listing agent as to how they will handle the reduction in commission, if any.

Then, we provide to the agents a Commission Modification Agreement with the two alternatives to splitting any required commission reduction:  equal or pro rata.   Those two alternatives provide a great way to determine the reduction depending upon whether the published commission is equal or not.

This approach meets the legal requirements for resolving this issue in advance.  The agent would be estopped from claiming that he did not know at the beginning that a commission reduction might happen.

The numbers of agents filing these suits or complaints with the local board is way too high and absurd.  Add to that the problem that there are some boards who are not protective of agents and the problem is magnified.  Then there is one arbitrator of a huge local board who made public statements that he would rule contrary to the law, which shows how biased and stupid some of these arbitrators can be.

I highly recommend that all agents should discuss the possibility of a reduction in the commission at the onset of the short sale and sign a Commission Modification Agreement along with submitting the purchase contract.

Or…… you could simply take the easy way out and only ask for the lowest commission in short sale cases.

Best Wishes,

Kenneth R. Lawson, JD

A recent court case underscores a recommendation I have been making for agents involved in short sale cases.

The homeowners contracted with a real estate agent to sell their home.  With the drop in market values, the agent helped the homeowners understand that they could still sell their home as a short sale.

The homeowners agreed and the agent went to work listing the property and seeking buyers.  They finally obtained an offer from a cash buyer, which looked great and had a good chance of being approved.

As we all know, this past spring short sale processing by the servicing lender and the secondary market investor (SMI) slowed to a standstill.  The contract terms made the contract terms binding and subject to third party lienholder approval of the short sale within 120 days.  Other terms were the customary subject to inspection, and the state form provided for easy exit fromt he deal by the buyer.

On day 95, the buyers backed out, claiming they had driven by the house for an inspection of the exterior and found it unsatisfactory.  They also claimed that the short sale addendum allowed them to back out of the deal.

The seller clients were livid.  It was now too close to the scheduled foreclosure sale.  They were unable to find a replacement buyer and the foreclosure was completed.  The seller clients sued their agent.  They claimed that the agent had a responsibility to make sure the contract was binding or otherwise they would have rejected the offers until they found a buyer willing to be bound to the agreement.   Since multiple offers were not accepted, the agent was unable to prove there would have been another buyer had the contract been binding.

For this reason, our firm has encouraged agents to have their client sellers sign a Binding Contract Waiver in the event the buyer walks.  There is greater liability in short sale cases because of the extreme result if the short sale fails, in contrast to normal sales.  The Binding Contract Waiver places the seller clients on notice of the possibility that a buyer may be able to get out of the deal and the seller clients would be unable to claim they did not know the risks.

We recommend that you all, as a matter of course, ask your seller clients to sign a Binding Contract Waiver in every short sale to prevent this potential area of liability.

Best wishes,

Ken Lawson JD

Ready for change?  Here it comes…or is it?

Through these articles, or blog posts, I have been attempting to educate agents concerning the many, many issues of misinformation that have provided in short sale books, courses, and training seminars.  Since I really have more of a warm heart of a teacher than a lawyer, I want to be of service to those of you who appreciate it.

So, I have helped bring clarity to who owns the note, the secondary market investor (SMI), and who approves short sales, the SMI, not usually the servicing lender the proposal is submitted to.  I have also attempted to help you understand that the old method of analyzing a short sale which merely compared the amount of loss if the short sale is approved has been replaced by most SMIs to the new net-to-lender minimum threshold percentage of the fair market value.  This change started late summer of last year and became widespread by the end of the year.

Now, bloggers are spreading the word about a new system under the new Making Home Affordable legislation.  They are sounding the alarm that there massive change taking place that is replacing the current system.

My response?   Whoaaaa, just a moment!   Stop.  Breathe.  What is taking place is not a major change.  There are a few changes but let’s put them into perspective.

First, the real change is the current political environment.   It does not take a political activist, extremist, or alarmist to see that the current administration and the liberal democratic majority in congress are attempting to change our way of life away from capitalism and substantially closer to the European models of socialism.  This is not a criticism but the reality.  Whether you are democrat or republican, liberal or conservative, progressive or traditionalist, the reality is that from the last election democrats believe they have a mandate to move us away from what they believe are the ills of capitalism.  The vast majority of lawyers are liberal/progressive, and I have my foot in both sides depending upon the issue.

How is this important?  Because there is war being waged between many of the financial institutions and the treasury department.  Treasury now owns both Fannie Mae and Freddie Mac, and a growing number of other institutions, both SMIs and servicing lenders.  Treasury is putting the squeeze on financial institutions with the stated purpose to vastly reduce the number of financial institutions.  That is their speak for pushing them to the brink of bankruptcy, then rescuing them (bail-out) and taking ownership.  One of the objectives of socialism is to take over employers, and financial institutions are one of the major 5 critical industries required to make socialism effective.

The MHA legislation was passed to help accomplish this.   Wait, it’s real purpose was to do something to help slow down the massive numbers of foreclosures.  However, the method was chosen to also assist in this societal change.  The main bloggers triggering alarms are stating that Fannie and Freddie own 85% of the mortgage loans.  Well, the government claims this, but it is actually not much more than 65%, but growing.  85% is their objective, a very important objective to meet their goals.

Under the new system, you will hear about the net present value formula that servicers will use to determine the list price and the price the property can be sold for.   This is nothing more than a new label for the current net-to-lender minimum threshold percentage of the fair market value.  The SMIs will provide instructions to their servicers to approve these short sales up front rather than submitting the short sales to the SMI each time for approval.  The SMIs will have their own trained representatives in the loss mitigation of the servicer to oversee the same system we have now.  The only real change will be that they will be able to use that to guide the agents as to the price reduction strategy to use in listing.

In my blog articles, I have made references to current experimental programs between Fannie, Freddie, Treasury and a number of servicing lenders.  Well, it is this that I was referring to.  It will likely continue to widen as they experience success and train everyone.  It is merely the moving of the current system to having the lenders work more up front to help agents meet the current requirements.

I will provide more information about this in the future.  However, I encourage you all to not panic, not react hastily, and not become overly concerned about its affect on short sales.  Yes, there will be new forms and communication with servicers before listing the short sale, but it is not as big of a change as many fear.

The political pendulum continues to swing back and forth between a capitalistic society and a socialist society.  We do not yet know if the current swing will become entrenched, but if it does not, the new changes in short sales will likely remain.  It is a sensible approach to try to solve the short sale problems.  However, even with these changes there will be unplease consequences.  Government always seems to create as many problems as they solve.  Sometimes the cure is worse than the disease, but sometimes it brings relief.

Best wishes,

Ken Lawson, JD

The “banks” here includes both the servicing lenders and the secondary market investors, and it is usually (but not always) the secondary market investors who approve the short sales.

The problem first came about when the mortgage crisis hit and people began losing their homes en masse.  The Treasury Department did little at that time.  This crisis also increased almost exponentially the numbers of short sales being processed by the servicing lenders and reviewed by the secondary market investors.

The servicing lenders were also in a severe financial crisis and many failed.  So add a financial crisis to suddenly needing many more processors to handle foreclosures and short sales, and this spelled trouble…in the form of extremely long short sale processing time.

Then came bailouts and servicing lenders now had incentives to foreclose.  Short sale buyers would not hang around for so many months, and many short sale packages were tanked by servicing lender processors.

In the last few months, Treasury has conducted a number of experimental programs with Fannie, Freddie, and a number of servicing lenders to find ways to efficiently process short sale proposals.

However, the biggest emphasis has been on getting servicing lenders to approve loan modifications.  With the law change in May requiring them to process workouts, loan modification approvals increased from about a reported 15% rate to a reported rate of approval of about 35%.

Now Treasury is trying to offset the previous disincentives to process short sales by approving more money to the lenders.  This is like what happened to bread in the 60′s.  Do you remember?   Bread bakeries took much of the nutrition to make white bread and added a little back.  They then proclaimed how great they were for adding nutrition.

Short sales are improving, however.  Our firm has seen a great reduction in the length of time it takes for servicing lenders to process our short sale proposals and forward them to the secondary market investor, and for these investors to approve them.  Many MI carriers, however, are still slow in processing and approving, but some are also improving.

Let’s hope that we see more improvement very, very soon.

Best wishes,

Ken Lawson JD

Ken Lawson, JD your short sale coach

I watch a lot of real estate agents, investors, and other business people struggling to stay on top of all the many details in running a successful business.

Moving a business from a start-up or even a stumbling position to an income-producing successful business is all about conforming your business to a successful model and then creating systems that are either automated, performed by “trained monkeys”, or minimize the amount of time taking care of the business of business.

Systems consists of people, technology, checklists, or procedures.  Anytime you find yourself getting bogged down, you create a system to open up the bottleneck.

One way to obtain more results with less time and effort is to leverage resources.  That means that you use other people to do more of what you do now.  In real estate this, of course, could refer to an assistant.  The assistant will do work for less cost than you do yourself.  The idea with leveraging the use of assistants is to delegate everything that does not require your skills to perform to the assistant.

Can’t afford an assistant?  If you cannot afford a full time assistant, considering paying another agent who has an assistant for some hours for your work.  Another alternative is to get together with other struggling agents and start a joint venture and share the expense of an assistant.

Leveraging means more than getting an assistant.  Leveraging applies to using other firms as well.  For example, leveraging TheLawsonGroup Mediation Services would allow you to focus on listings and just turn them over to us to deal with the banks.  Many of you are already using us to leverage your own success.  There is no cost to you nor do our fees come out of your broker commissions.

There is another way to leverage other people.  I know several successful agents who use other agents to do the detail work and take a negotiated referral fee.  One of these agents made over $120,000 last year solely from referrals.  She limits her time almost exclusively to marketing.

Leveraging, however, consists of technology as well.  Our firm uses Google Apps Intranet connected to our firm website.  This intranet service provides excellent processing and categorizing of emails, a great calendar integrated with the task list, and the ability to store all of your documents, and even create them, online.  For teams, it allows messaging and chat, checking each others’ calendars, and both public and private access to documents.

One great feature of Google Apps is that all of my emails can be viewed from my Blackberry (many of you already have that) and my calendar is sync’d with my blackberry when changes are entered.

However, when I coach real estate business, the most common error I find is the improper use of organization and time.  I wrote an article on this some time ago.  I did not think that I needed training in time management — until I received training in time management.  Now I understand it to be absolutely essential in moving a business into a successful enterprise.

For a free time management summary with forms, send an email to Info@LawsonGroupMediation.com and insert in the subject field: “Time Management”.

For those of you who are submitting your own short sale packages to servicing lenders, it is imperative to leverage systems to cut your time.  For example, we perform activities most agents do not do.  We complete a document review when submitted to us by agents (setting up the file and reviewing the documents until complete accumulates approximately 1 hour).  We then perform both a legal analysis and a market analysis that accumulates another approximately 1 hour.  Drafting the proposal and submitting it to the lender will add about another 1 hour.  We have very specific times when we call the lenders, so we spend very little time on the phone with them.  Even with lenders who are problematic we have efficient systems to keep the time to a minimum.  To perform all of these additional activities increases the likelihood of approval, so we leverage technology, procedures, and checklists to make it happen and keep our costs low.

For those of you who are not yet successful, I hope this article has started you thinking creatively to leverage anything around you that will save you time, produce greater results, and make your business a success.  If you need help, we are here and available to provide you with whatever assistance you need.

Best wishes,

Ken Lawson, JD

Ken Lawson, JD your short sale coach

A lot of people have been required to sign a promissory note as a condition to the lender approving a short sale.

The promissory notes are usually for a small to moderate percentage of the deficiency balance, paid over ten (10) years, with no interest.  The promissory note requirement is usually a good deal, and see my other articles on this subject concerning predicting when a promissory note will be required.

However, many homeowners are in severe financial distress, and the thought of having another payment following the short sale is not a happy one!

Most borrowers after a short sale need to find a place to rent, and another payment on top of rent might often push the borrowers over the edge.  It is often the case that a short sale falls through simply because the borrower rejects the idea of a promissory note.

However, do not despair!  There is a way out of it.

Your seller may only have to make the promissory note payments for a year, or even less.

Why?  Because after the file is closed and the new loan (promissory note) has been set up for collections, a short time is required for the lender to see that the borrower makes faithful payments.  If so, then about a year out (often as soon as immediately, depending upon the lender), the borrower can seek to settle the debt for a fraction of what is owed.

“But for how much?” you might ask.  Almost any lender will settle a promissory note for 80%, without hesitation.  60% takes some discussion and effort to convince them, but many will do it.  To settle the debt for 50% may require financial distress on the part of the borrower, with low income and difficult circumstances.

The best way is to go to a lawyer and have the lawyer draft a letter and fax it to the lender’s customer service department (collections), with a copy to the lender’s bankruptcy department.  The lawyer can state that the borrowers have come to him to discuss the promissory note obligation, and their difficulty paying it.  They are considering bankruptcy, but this promissory note is the only issue causing that consideration.  The lawyer then makes an offer for 10%-30% depending upon the borrowers’ financial condition.

In my law practice, we often contacted various creditors when the clients did not really need a bankruptcy, but did need relief.  10%-30% was often the amount for which the lenders would settle.  However, it was often the case that my being an attorney was the instrument that got them to agree.  Why?  Because the lenders know we are serious.

Best wishes,

Ken Lawson, JD

TheLawsonGroup Mediation Services